A&M Tax Advisor Weekly
On June 21, 2018, the U.S. Supreme Court decision in South Dakota v. Wayfair (“Wayfair”), 585 U.S. ___ (2018), overturned the long-standing precedent embraced 26 years earlier in its 1992 decision in Quill v. North Dakota requiring physical presence for sales and use tax nexus. In Wayfair, the U.S. Supreme Court held that in-state, physical presence is no longer necessary for a state to require a business to collect and remit sales tax but, rather, merely having either a certain amount of sales or transactions in a state (commonly referred to as economic nexus) may create such sales tax obligations for out-of-state sellers. Over the past 19 months since the Wayfair decision, nearly all states have adopted economic nexus for sales tax.
However, the impact of the Wayfair decision is stretching beyond sales tax and is giving rise to state and local income and gross receipts tax implications. Wayfair has emboldened certain states to adopt economic nexus and enforce pre-existing economic nexus standards for income and gross receipts taxes.
Pre-Wayfair Economic Nexus for State Income and Gross Receipts Tax
Prior to Wayfair, Alabama, Colorado, California, Connecticut, Michigan, New York and Tennessee adopted factor presence nexus, or a comparable economic nexus standard, that provides a bright-line test for income tax nexus if a taxpayer’s annual sales in the state exceed a threshold amount. Other states that impose gross receipts taxes, such as Ohio and Washington, have adopted similar factor presence nexus standards.
For example, New York enacted an economic nexus standard as part of its corporate income tax reform, which took effect for tax years beginning on or after January 1, 2015, and asserts that a taxpayer is doing business in the state if it has receipts of $1 million or more in the state. Other states have laws comparable to the model statute adopted by the Multistate Tax Commission in 2002, which provides that income tax nexus is established if any of the following thresholds are exceeded: (1) $50,000 in property, (2) $50,000 in payroll, (3) $500,000 in sales, or (4) 25% of total property, total payroll, or total sales.
In addition to factor presence nexus, certain states have asserted economic nexus over out-of-state taxpayers from the in-state use of intangible property (i.e., trademarks, trade names, etc.). In the landmark case decided in 1993, Geoffrey, Inc. v. South Carolina Tax Commission, S.C. Sup. Ct., 437 SE2d 13; cert. denied, 114 S. Ct. 550, the South Carolina Supreme Court held that the licensing of trademarks and trade names by an out-of-state (Delaware) corporation for use in South Carolina established income tax nexus even without any physical presence in the state. Following Geoffrey, certain states have asserted economic nexus under similar circumstances through statutory, judicial and regulatory authority.
Post-Wayfair Economic Nexus for State Income & Gross Receipts Tax
In light of Wayfair, states have been emboldened to adopt economic nexus standards for income and gross receipts taxes. A brief overview of some of these states include:
Hawaii (SB 495): In July 2019, Hawaii adopted an economic nexus standard for taxing out-of-state businesses on their business income earned in Hawaii. Effective for tax years beginning after December 31, 2019, a taxpayer that lacks physical presence in Hawaii is presumed to have income tax nexus if, during the current or preceding calendar year, the taxpayer either engages in 200 or more business transactions or has gross income of $100,000 or more in Hawaii.
Massachusetts (830 Mass. Code Regs. 63.39.1): Massachusetts promulgated a regulation in October 2019 which generally asserts that a corporation has income tax nexus when its Massachusetts sales for the taxable year exceed $500,000.
Oregon (HB 3427): Oregon recently enacted a commercial activity tax, effective January 1, 2020, which uses a “bright-line presence” standard if the taxpayer has at least $750,000 of Oregon receipts for the calendar year.